Question
In: Economics
Consider a public policy aimed at reducing smoking. Studies indicate that the price elasticity of demand for cigarettes is about 0.8.
Consider a public policy aimed at reducing smoking. Studies indicate that the price elasticity of demand for cigarettes is about 0.8.
a. If a pack of cigarettes currently costs $5 and the government wants to reduce smoking by 20%, how much should it increase the price of a pack of cigarettes by?
b. If the price increase is permanent, will the effect on smoking be greater in 3 months or 3 years? Why?
Solutions
Expert Solution
a) E = 0.8
Since the government wants to reduce smoking by 20%, it should increase the price by:-
0.8 = 20/change in price
Change in price = 20/0.8 = 25%
so, it should increase the price by 25%
b) The effect on smoking will be greater in 3 years since the price elasticity of demand is inelastic in the short run and elastic in the long run.
Rahul Sunny answered 2 years agoRelated Solutions
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